phoenix petroleum - the little giant

7/25/2019 Phoenix Petroleum - The Little Giant

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Phoenix PetroP11.20 - BUY

FinancialsYear to 31 Dec 08A 09A 10CL 11CL 12CL

Revenue (Pm) 4,615 5,873 14,166 19,455 24,874Net profit (Pm) 150 751 406 686 1,062EPS (P) 0.80 2.79 1.08 1.82 2.82EPS growth (% YoY) (5.3) 249.2 (61.4) 69.2 54.7PE (x) 14.0 4.0 10.4 6.1 4.0Core EPS (P) 0.80 0.66 1.08 1.82 2.82Core EPS growth (% YoY) (5.3) (17.2) 62.7 69.2 54.7FCF yield (%) (11.3) (40.4) (43.9) 27.4 16.6PB (x) 3.0 2.0 1.7 1.3 1.0ROE (%) 23.9 67.7 20.0 23.9 28.4Net debt/equity (%) 79.1 125.0 126.2 59.5 25.0Source: CLSA Asia-Pacific Markets

Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Leo [email protected](63) 28604013

13 January 2011

PhilippinesPowerReuters PNX.PSBloomberg PNX PM

Priced on 12 January 2011Phils Phisix @ 4,032.4

12M hi/lo P13.80/4.64

12M price target P15.97% potential +43%Target set on 12 Jan 11

Shares in issue 376.8mFree float (est.) 28.7%

Market cap US$96m

3M average daily volumeP3.4m (US$.1m)

Foreign s'holding 0.9%

Major shareholdersPhoenix Petroleum Holdings Inc53.1%Udenna Corp 13.4%

Stock performance (%)1M 3M 12M

Absolute 4.7 56.6 127.2Relative 7.4 63.9 73.9Abs (US$) 3.6 54.8 134.6

1.3

3.9

6.5

9.1

11.7

Jan-0 9 Jul-0 9 Jan-10 Jul-100

50

100

150

200

250

300

350

400

Phoenix Petro (LHS)Rel to Phisix (RHS)

(%)(P )

Source: Bloomberg

www.clsa.com

I ni

t i a t

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v e

r a g e

The little giantWe initiate coverage on Phoenix Petroleum with a BUY recommendationowing to its strong market positioning and inexpensive valuations. Thecompany is on an aggressive expansion mode and is seeking to have the4 th largest network by 2015 with over 500 service stations and 5%volume market share. The growth in its retail station network will driveearnings growth over the next two years by annual EPS growth at 55-69% with ROEs between 24-29% --- further highlighting its inexpensivevaluations. Our target price is based on a 40% discount to the 14.6x2011CL market PE implying 43% upside.

The only publicly-listed independent oil playerThe Philippine oil industry has gone through massive changes over the past

fifteen years. From full regulation in the 1970s as a result of the oil crisesthen, it is now a fully-deregulated environment with over 60 participants.Phoenix Petroleum is one of the main beneficiaries of the significant change inthe regulatory environment and it is engaged in all aspects of thedownstream oil industry.

Aggressive expansion modeIt currently has 148 service stations mostly concentrated in the Mindanaoarea. Over the next 2-3 years and with a P3bn capex program, it will rapidlyexpand in Luzon to bring its service network to over 500 service stations by2015. Metro Manila is located in Luzon (home to 71% of the countrys motorvehicles). It is also beefing up terminal system to bring its distributionnetwork closer to its customers bringing down costs. While it currently has amarket share of just 1.2% by volume and 3.8% by retail station, we believethat the company will eventually the 4 th largest oil player in the country afterShell, Chevron and Petron.

Inexpensive valuationsValuations remain inexpensive for Phoenix Petroleum. At 6x 2011CL earnings,we think that it remains undervalued despite trading at close to the top ofhistorical PE multiple range. We believe that the historical trading PE and PBranges do not accurately capture the re-rating story for Phoenix Petroleumwith its expansion into the higher gross margin retail station business andless reliant on the more commodity-based commercial fuel supply business.The company has strong 69% EPS growth and 28% ROE for this year. Webelieve that it should trade at higher multiples with a narrower 40% discountto the 2011CL market PE of 14.6x, the basis for our P15.97 target price.


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The little giant Phoenix Petro - BUY

13 January 2011 [email protected] 2

Industry and companyThe Philippine oil industry has gone through massive changes over the pastfifteen years. From a government-regulated industry with just three playersbeginning in the 1970s, it is now in a fully-deregulated environment with over60 participants through the entry of new players. Phoenix Petroleum Phils isone of the main beneficiaries of the significant change in the regulatoryenvironment.

Industry backgroundPrior to the deregulation of the industry, it was the government that set thelocal prices of all petroleum products sold locally from 1973 onwards.Furthermore, after a period of consolidation in the 1970s the oil marketingindustry was also just limited to three players: Caltex Phils (now calledChevron Texaco Phils), Pilipinas Shell and the government-owned Philippine

National Oil Company (PNOC). These companies are known in the industry asthe Big Three and these three entities were not just petroleum productmarketers but also had their own refineries. The service stations of PNOCwere under the brand name Petron and the marketing arm became a publicly-listed company when Petron had its IPO in September 1994.

Since the Philippines imports 99% of its petroleum requirements, significantincreases in the price of petroleum products are always particularly hard onthe country. To address the shocks of the oil crises in the 1970s, thegovernment of President Ferdinand Marcos (1965-1986) set up the Oil PriceStabilization Fund (OPSF). The rationale for the OPSF was to cushion and helpride out the effects of the volatility in global petroleum prices in the localmarket. In times of low crude oil prices, the OPSF would be replenished andduring times of rising crude oil prices, the oil companies would draw on thefund to smoothen out local pump prices.

However, the use of the OPSF was highly politicized with the governmentincurring substantial budget deficits as it tried to defer price increases toavoid public protests. What would happen then was a massive increase inlocal pump prices when the government could no longer hold off priceincreases. It can be said that some of the coup attempts in the 1980s duringthe administration of President Corazon Aquino (1986-1992) tried to ride onpublic indignation (through several general strikes) during one such incidentwhen pump prices of gasoline went up by 50% overnight from P14 to P21 perlitre. Moreover, some administrations had also drawn on the OPSF when itwas in surplus to fund non-oil-related expenditures.

It was during the administration of President Fidel Ramos (1992-1998) whenthere were moves to deregulate certain industries such as the power,telecommunications, banking and oil. For the oil industry, the deregulation ismerely a return to the state of the industry prior to 1973.

The current deregulated environment is actually the Philippines secondattempt in deregulating the industry. Prior to the current set-up, Congresshad passed a law (RA 8180) in 1996 that had deregulated the industry.However, the Supreme Court had declared the law unconstitutional becauseof three provisions in the law: 1) the 4% tariff differential between crude and

finished oil products; 2) provisions on predatory pricing; and, 3) theimposition of minimum 60-day inventory requirements. The Supreme Courtdeclared that these provisions unconstitutional as these were detrimental tocompetition by giving undue advantages to the existing oil companies.

Following a period ofconsolidation, the oil

firms were limited to theBig Three in the 1970s

Oil Price StabilizationFund set up in response

to the oil crises during the1970s

The use of the OPSF washighly politicized by some

administrations

Several sectors werederegulated during the

1990s

The current environmentis the second attempt atoil industry deregulation

Phoenix Petroleum is oneof the main beneficiaries

of oil industryderegulation


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The Downstream Oil Industry Deregulation Act of 1998 (RA 8479) allowedmarket competition and removed government control on the pricing,

exportation, and importation of petroleum products as well as theestablishment of retail outlets, storage depots, ocean-receiving facilities andrefineries. The revised law was essentially still the same version as theprevious one but without the unconstitutional provisions. This law alsorequired the oil industry players to go public within a certain period of time.Since the passage of the law, the Big Three have been able to get defermentson this listing requirement and so far only one company has complied withthis provision.

The governments role in the deregulated environment would be relegated toone of monitoring price movements of local pump prices as well as importsand exports. Since under this law there are no government subsidies and thatthe oil players let market forces determine prices, the government would stillat times use moral suasion on oil companies not to increase their prices toorapidly. It also had used its influence in deferring oil price increases throughPetron as a 40% equity owner through PNOC, ie, Caltex and Shell would notimmediately raise prices if it knew that Petron would not raise its prices in thenext few days.

Aside from the Big Three, there are more than 60 players in the deregulatedoil industry environment since 1998. These are known in the industry as the

independent players. Most of them are local firms but there are some largeforeign-owned firms such as PTT of Thailand, Petronas of Malaysia, Liquigaz ofthe Netherlands and Total of France.

We believe that the current deregulated oil industry environment is here tostay. While there are still calls by some sectors and the occasionalCongressman for a repeal and/or review of RA 8479 from time to time(especially during times when local pump prices are on the upswing), protestsare no longer mainstream and come mainly from the more militant groups.We believe that this is due to more public acceptance of an environmentwhere small incremental price changes (either up or down) are the normrather than large, lumpy ones.

The state of the industryThe Philippines consumes slightly more than 310,000 barrels per day (BPD) ofpetroleum products, up from 225,000 BPD in 2006. Around 50% of thisdemand is addressed by the direct importation of finished petroleum productswhile the balance of 50% is supplied by the production of finished petroleumproducts from the two local refineries of Pilipinas Shell and Petron. In 1H2010alone, Philippine demand for petroleum products rose by 5.4% to 56.2mbarrels (MMB).

Figure 1

Philippine petroleum products supply and demand (MMB)

2007 2008 2009 2010Refined production 72 65 52 59Imported finished products 46 48 58 57Total supply 118 113 110 116Total demand 105 101 107 112

Source: Phil Dept of Energy

The current deregulatedenvironment has been in

existence since 1998

The government isrelegated to monitoring

the industry

We believe that thecurrent deregulatedenvironment is here to

stay

Currently more than 60players in the space

The Philippines consumesslightly more than

310,000 BPD of

petroleum products


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Chevron Texaco Phils no longer operates its refinery in San Pascual, Batangasand merely serves as a finished-import terminal. The refineries of Pilipinas

Shell and Petron have capacities of 110,000 BPD and 180,000 BPD,respectively. The Petron refinery is located in Limay, Bataan while the refineryof Pilipinas Shell is located in Tabangao, Batangas. This means that even ifboth refineries were running at their stated capacities, they output will stillnot be enough to meet the countrys demand for finished oil productsmeaning that either the Big Three or the independent players must importrefined petroleum products on their own.

The product mix of local refinery production and demand roughly mirror eachother with any gaps taken in by the direct importation of finished petroleumproducts. Diesel fuel, used mainly for transportation and for powergeneration, accounts for around 121,000 BPD (39% of total) followed bypremium gasoline (55,800 BPD) and heavy fuel oil (52,700 BPD)

Figure 2 Figure 3

Local refinery production volume breakdown (%) Demand volume breakdown (%)

LPG7% Premium

gasoline13%

Regulargasoline

5%

AVTurbo10%

Kerosene2%

Diesel34%

Heavy Fuel Oil21%

Others8%

LPG11%

Premiumgasoline

18%

Regulargasoline

4%AVTurbo

9%

Kerosene1%

Diesel39%

Heavy Fuel Oil17%

Others1%

Source: Phil Dept of Energy Source: Phil Dept of Energy

The Philippine oil industry is generally divided into three categories: retailtrade, industrial trade and the liquefied petroleum gas (LPG) trade. The BigThree firms still control 79% of the market for total petroleum products involume terms. The market shares for the retail service station market do notchange much with the independent oil players still accounting for around 21%of the market.

The countrys totalrefining capacity is less

than consumption

Diesel accounts for 39%of volume demand

Independent oil playersaccount for 21% of total

and retail market share


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Figure 4 Figure 5

Total petroleum product market share volumebreakdown (%)

Total retail market share volume breakdown (%)

Pilipinas Shell28%

Petron38%

Chevron TexacoPhils13%

Independents20%

End-users1%

Pilipinas Shell30%

Petron37%


Total3%

Otherindependents

18%

Source: CLSA Asia-Pacific Markets Source: CLSA Asia-Pacific Markets

We estimate that the demand for petroleum products will grow between 4-5%annually over the next 2-3 years with the transportation sector continuing totake more than 34% of petroleum products consumed in the country. Due tothe increase in LPG consumption by the transportation sector, we estimatethat this has increased by around 2 pt over the past three years from 32%.The driver for this growth in the transportation can be seen in the number ofnew vehicles sold as well as the new and renewal of car registrations.

Vehicle sales continued to be strong last year with around 169,000 units sold,an increase of nearly 37,000 units or +28% YoY. Last year was abreakthrough since it was the first time that annual vehicle sales haveexceeded the highest ever figure of 162,000 in 1996 right before the AsianFinancial Crisis. Since 2002, vehicle sales growth has been ranging from 3-28% with only in 2004 where there was a 3% YoY decline in sales. For 2011,the Chamber of Automotive Manufacturers of the Phils (CAMPI) is looking atan initial growth rate of 5% for this year or 177,000 vehicles.

We believe that the CAMPI data understates the amount of vehicles on theroad as the data does not include the following vehicles: 1) vehicles sold bynon-CAMPI members such as Korean brands; and, 2) the private importationof second-hand and pre-owned vehicles. Take note that there is a largevariance between the new vehicle sales as reported by CAMPI and the newvehicle registrations data disclosed by the government agency LandTransportation Office (LTO). Since the CAMPI data does not includemotorcycles and tricycles, we also stripped out the motorcycles and tricyclesfrom the registration data of the LTO. Looking at the 2008-2009 data alone,there seems to be an extra 50,000 vehicles that are not captured by theCAMPI figures.

2010 vehicle sales havefinally exceeded the

previous all-time high setin 1996

CAMPI data may actuallyeven be understated

Petroleum productdemand seen to grow 4-

5% annually driven bytransportation


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Figure 6

New vehicle sales vs new vehicle registrations

2002 2003 2004 2005 2006 2007 2008 2009

New vehicle sales 84,041 90,535 88,003 97,063 99,541 117,903 124,449 132,444Imports andunclassified 114,889 105,029 138,852 76,608 74,567 233,826 53,002 50,145New vehicleRegistrations (ex-motorcycles andtricycles) 198,930 195,564 226,855 173,671 174,108 351,729 177,451 182,589

Source: CAMPI, Land Transportation Office

Figure 7 Figure 8

New vehicle sales (units) Petroleum products sector use breakdown (%)

-

30,000

60,000

90,000

120,000

150,000

180,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Transport34%

Residential29%

Industrial25%

Commercial10%

Agricultural2%

Source: CAMPI Source: Phils Dept of Energy

Based alone on the number of annual registrations of motor vehicles(inclusive of motorcycles and tricycles) there are around 6.2m vehicles onPhilippine roads as of end-2009. No data has yet been released by the LTO for2010 but estimate that this should grow at the very minimum the growth rateof CAMPIs vehicle sales suggesting that as of the end of last year, thereshould be at least 6.5m registered vehicles on Philippine roads. Of thesenumber of vehicles approximately 71%, or 4.6m vehicles can be found onLuzon island.

Figure 9 Figure 10

Vehicle registrations (new and renewals) (m units) Vehicle registrations (new and renewals) geographicalbreakdown (%)

0

4

8

12

2002 2003 2004 2005 2006 2007 2008 2009

National CapitalRegion

28%

Luzon (ex-NCR)43%

Visayas15%

Mindanao14%

Source: Land Transportation Office Source: Land Transportation Office

An estimated 6.5mregistered vehicles are on

Philippine roads


7/15



Background: Phoenix Petroleum PhilsPhoenix Petroleum is an independent oil player incorporated in May 2002 as a

Davao, Philippines-based fuels wholesaler under the name Davao Oil TerminalServices Corp (DOTSCO).

The company is engaged in all aspects of the downstream oil industry.Phoenix Petroleum does the following activities: 1) trading of petroleumproducts gasoline, diesel, jet A-1; 2) blending of lubricants and otherchemical products; 3) owning and operating retail stations; 4) supplyingfinished petroleum products to commercial and industrial accounts; and, 5)terminaling, hauling and into-plane services for commercial and generalaviation. It does not operate a refinery so the company basically acquiresfinished petroleum products from its suppliers. The company also has a smallproperty development business where it sells industrial lots from an industrialpark that it acquired in 2009. Phoenix Petroleum is the exclusive supplier ofaviation fuel for low-cost carrier Cebu Pacific in Mindanao.

Figure 11

Phoenix Petroleums businesses and brands

Source: Phoenix Petroleum

Phoenix Petroleum operates its own end-to-end supply chain that originatesfrom either its terminals or foreign refineries and then go into inter-islandvessels. These are then stored in the companys supply depots and then arehauled by the companys tanker-truck fleet for delivery to commercial andindustrial accounts or its retail stations.

Founded in 2002 as afuels wholesaler

Owns its own end-to-endsupply chain

Now engaged in allaspects of the

downstream oil industry


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Figure 12

Phoenix Petroleum supply chain

Source: Phoenix Petroleum

The company entered the retail network business in 2005 with an initial fivestations under the Phoenix brand. In August 2006, the companys namewas officially changed into its current Phoenix Petroleum Phils name. It nowhas 148 retail stations located mainly in Mindanao (116) and then followed bystations in Luzon (30) and Visayas (2). In 2009, the company had acquired a65-hectare industrial park in Calaca, Batangas through the acquisition ofBacnotan Industrial Park Corp (BIPC). It has also gotten Board ofInvestments (BOI) approvals and registrations as a New Industry Participantwhich has given it several 5-year income tax holidays for its depots.

Figure 13 Figure 14

Number of service stations End-9M10 service station geographical breakdown (%)

- 520

33

86

120

148

-20406080

100

120140160

2004 2005 2006 2007 2008 2009 9M2010

Mindanao79%

Visayas1%

Luzon20%

Source: Phoenix Petroleum ` Source: Phoenix Petroleum

Around 79% of Phoenix Petroleums retail stations are located in Mindanaowith the concentration in the southern portion near Davao. So despitePhoenix having just a nationwide market share of 3.8% (in terms of stations),its concentration of stations in Southern Mindanao give it a 23% marketshare, tying it with Petron, its other competitor with the largest market sharein the region.

Entered the retailnetwork business in 2005

with 5 stations

Concentration in SouthernMindanao gives it a local

market share of 23%


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Figure 15 Figure 16

Nationwide retail station breakdown (%) Southern Mindanao retail station breakdown (%)

Pilipinas Shell23.3%

Petron34.9%

Chevron TexacoPhils

24.7%

Seaoil4.6%

Phoenix3.8%

Jetti1.7%

Flying V6.0%

Unioil0.5%

Eastern0.4%

Pilipinas Shell17%

Petron23%


Phoenix23%

Otherindependents

22%

Source: Phoenix Petroleum Source: Phoenix Petroleum

The majority of Phoenix Petroleums revenues come from Luzon despite thecompanys Mindanao origins. In 9M10, Visayas-Mindanao revenues grew by93% YoY, the Luzon revenues grew even faster at 6x on account of significantgrowth in retail, commercial and airline revenues. It was in 2010 whererevenues from Luzon overtook the revenues from the Visayas-Mindanaoregions. This is quite a dramatic change as just in the previous year, Visayas-Mindanao revenues accounted for 77% of Phoenix Petroleums total revenues.

Commercial accounts still comprise nearly half of Phoenix Petroleums

revenues with airline and retail accounting for 30% and 22% of revenues,respectively. Over-all gross margins are around 8-9% but retail has highermargins at between 10-13%.

Figure 17 Figure 18

Revenue by area breakdown (%) Revenue by product breakdown (%)

Luzon53%

Visayas-Mindanao47%

Retail22%

Commercial48%

Airline30%


The strong expansion of the company has considerably brought up revenuesand earnings over the past few years. Phoenix Petroleums consolidatedrevenues as of end-9M2010 were at P9,783m, a 163-fold increase from 2004,or a 143% CAGR. This made it the 211 th largest firm in the Philippines as of2009 from being the 570 th largest just three years previously. Earningsgrowth too was strong. From P0.8m in net profits in 2004, net profits in9M2010 reached P259m, 2% higher than the P254m core net profit reported

Since 2004, revenues andearnings have had CAGRs

of 143% and 174%,respectively

In 2010, revenues fromLuzon overtook Visayas-

Mindanao

Retail has the highest

gross margins at 10-13%


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in 2009. Adding back the P497m one-time gain in 2009, the companyreported P589m in earnings during that period. Since 2004, Phoenixs

earnings have enjoyed a 174% CAGR.Figure 19 Figure 20

Consolidated revenues (Pm) Core net profits (Pm)

60 6801,494

2,377

4,615

5,873

9,783

-

2,000

4,000

6,000

8,000

10,000

12,000

2004 2005 2006 2007 2008 2009 9M2010

1 4

74

122150

254 259

-

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 9M2010


The company is run by professional managers with the members of the seniormarketing, sales and operations management teams having an averageexperience of 18 years in the oil industry. Two members of the family of thecontrolling shareholders, Domingo Uy and Dennis Uy, hold the positions ofChairman and President and CEO, respectively.

It is the only oil industry firm that has complied with RA 8479 to go publicwith its IPO done in July 2007. The IPO was 15x oversubscribed at P9.80 andwas P355m in size. The companys IPO was broken down into 80% primaryand 20% secondary shares. The company was able to raise P284m which itused for the expansion of its retail station network and depot and logisticsfacilities over 2007-2008.

Phoenix Petroleum is 69.9%-owned by the Davao-based Uy Family throughPhoenix Petroleum Holdings Inc (53.1%), Udenna Corp (13.4%) and UdennaManagement and Resources Corp (3.4%). Miscellaneous parties own 1.5% ofthe company while the free float is at 28.7% although if we strip out the9.6% holdings of the government-controlled pension fund Social SecuritySystem (SSS), the free float is reduced to 19.1%. The company is very much

under-owned by foreigners with shareholdings of non-Filipinos at less than1%.

The controllingshareholders own 69.9%

of the company

The only oil industry firmthat has complied with

law and gone public

The Chairman andPresident and CEO

positions are held bycontrolling shareholders


11/15



Figure 21 Figure 22

Shareowner breakdown (%) Foreign and local shareholding breakdown (%)

Phoenix P etroleumHoldings Inc

53.1%

Udenna Corp13.4%

Others1.5%

UdennaManagement and

Resources Corp3.4%

Free float28.7%

Local99%

Foreign1%


Aggressive expansion plansThe company has aggressive expansion plans over the next 2-3 years. It willbe spending a total of over P3bn in order to fund its expansion plans ofputting additional service stations (+189) and building up additional depotcapacity (+112% to 202.3m litres) in six locations. The bulk of the servicestations will be in Luzon where 71% of the registered motor vehicles arefound. The additional storage capacity will be built up in the followinglocations: 1) Calaca, Batangas; 2) New Washington, Aklan; 3) Subic Freeport;4) Bacolod, Negros Occidental; 5) Villanueva, Misamis Oriental; and, 6)General Santos City.

The aim of the expansion is to hit volume market share of 5% by 2015 fromthe current 1.2% in 2009. We estimate that it is possible for it to havedoubled its volume market share to around 2.4% through a 54% increase insales volumes driven by the expansion of its retail station network from 120to 165 outlets (+38% YoY).

We estimate that the higher gross margin retail station business will accountfor a higher percentage of the companys revenues going forward. Fromaround 22% of revenues last year, we expect revenue contributions from theretail business to increase to 27% of the total in the next 2-3 years displacingthe large commercial accounts business.

Figure 23 Figure 24

Number of service stations Monthly sales volumes (KL)

- 5 20 33

86120

165

219267

342

408

-50

100150200250300350400450

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

C L

2 0 1 2

C L

2 0 1 3

C L

2 0 1 4

C L

- 426 1,703 2,810

7,32310,218

14,05016,578

20,212

25,889

30,885

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2 0 0

4

2 0 0

5

2 0 0

6

2 0 0

7

2 0 0

8

2 0 0

9

2 0 1

0

2 0 1 1 C L

2 0 1 2 C L

2 0 1 3 C L

2 0 1 4 C L


Volume market share of5% by 2012

Capex program of P3bnover the next 2-3 years toroll out stations and built

storage capacity

The retail stationbusiness will account for27% of total revenues in

the next 2-3 years


12/15



Inexpensive valuationsDespite its strong outperformance of its share price over the past 12 months,we believe that Phoenix Petroleum remains significantly undervalued. Withstrong 69% and 55% EPS growth in 2011 and 2012, respectively, as well ashigh ROEs, it is one of the cheapest counters in our coverage (Fig 25 and 26).For 2011, we estimate that Phoenix Petroleum has the 4 th highest ROE at24% while having the 2 nd highest EPS growth for this year at 69%.

Figure 25 Figure 26

2011CL PB vs ROE 2011CL PE vs EPS growth

-0.51.01.52.02.53.03.54.04.55.05.5

- 10 20 30 40 50

ROE (%)

P B

( x )

PNX

-

5

10

15

20

25

30

35

40

45

- 20 40 60 80 100

EPS growth (%)

P E

(

x )

PNX


While it is currently trading at close to the top of its historical PE and PBtrading bands, we believe that the historical bands do not accurately capture

the re-rating story of Phoenix Petroleum. With its strong brand franchise andaggressive expansion, we believe that Phoenix Petroleum should trade at anarrower discount to the 2011CL market of 14.6x as it re-rates going forwardover the next 12 months.

Figure 27 Figure 28

12-month forward PE bands (x) 12-month forward PB bands (x)

min0.4x

1.3x

avg2.3x

4.6x

max6.8x

0.3

5.3

10.3

15.3

20.3

25.3

Jan07 Jan08 Jan09 Jan10 Jan11 Jan12

min0.17x

0.34x

avg0.52x

0.98x

max1.45x

0.6

5.6

10.6

15.6

20.6



Phoenix Petroleum hasthe 4 th highest ROE and2 nd highest EPS growth

this year

The historical PE and PBmultiples do not

accurately capture the re- rating


13/15



Figure 29 Figure 30

Trailing PE bands Trailing PB bands (x)

min1.1x1.7xavg2.3x

6.9x

max11.5x

0.9

5.9

10.9

15.9

20.9

25.9

30.9

35.9

40.9

45.9


min0.23x

0.45x

avg0.66x

1.25x

max1.85x

0.9

5.9

10.9

15.9

20.9

25.9



We do indeed realize that Phoenix Petroleum can never trade at par with themarket PE due to its small market capitalization and low trading volumedespite the strong earnings growth and high ROEs but we believe that thediscount should narrow from the current 58% discount to the market to 40%.This 40% discount to the 14.6x 2011CL market PE is the basis for our P15.97target price and the still significant discount (at the target price) should morethan enough to compensate for market cap and trading volumes. Even at ourtarget price, Phoenix Petroleum will still lie below the trendline in Fig 26.

We initiate coverage on Phoenix Petroleum with a BUY recommendation with

a potential 43% upside to our P15.97 target price.

A narrower 40% discountto the 14.6x 2011CL

market PE is warranted

BUY with a potential 43%upside


14/15



Summary financialsYear to 31 December 2008A 2009A 2010CL 2011CL 2012CLSummary P&L forecast (Pm)Revenue 4,615 5,873 14,166 19,455 24,874Op Ebitda 224 361 767 1,162 1,558Op Ebit 165 284 667 953 1,265Interest income 44 (1) 15 6 8Interest expense (64) (110) (269) (258) (176)Other items 0 573 0 20 20Profit before tax 144 747 413 722 1,117Taxation 6 5 (7) (35) (55)Minorities/Pref divs 0 0 0 0 0Net profit 150 751 406 686 1,062

Summary cashflow forecast (Pm)Operating profit 165 284 667 953 1,265Operating adjustments 0 0 0 0 0

Depreciation/amortisation 59 77 100 209 293Working capital changes 110 (569) (1,834) 1,758 (54)Net interest/taxes/other (46) (115) (276) (293) (231)Net operating cashflow 288 (322) (1,343) 2,627 1,272Capital expenditure (526) (896) (510) (1,472) (573)Free cashflow (238) (1,218) (1,853) 1,155 700Acq/inv/disposals 19 (261) 128 115 135Int, invt & associate div 17 (34) (7) 6 8Net investing cashflow (490) (1,191) (389) (1,350) (430)Increase in loans 453 1,373 1,274 (1,243) (874)Dividends (15) 0 (13) 0 0Net equity raised/other 6 149 468 0 0Net financing cashflow 445 1,522 1,728 (1,243) (874)Incr/(decr) in net cash 243 9 (4) 34 (32)Exch rate movements 0 0 0 0 0

Opening cash 114 357 366 362 395Closing cash 357 366 362 395 364

Summary balance sheet forecast (Pm)Cash & equivalents 357 366 362 395 364Debtors 765 1,369 1,955 1,999 2,376Inventories 156 458 1,151 1,445 1,851Other current assets 179 726 694 694 694Fixed assets 881 1,700 2,110 3,373 3,652Intangible assets 0 0 0 0 0Other term assets 30 69 76 76 76Total assets 2,368 5,003 6,663 8,217 9,167Short-term debt 831 1,549 2,779 874 294Creditors 750 1,059 464 2,575 3,337Other current liabs 0 53 53 53 53Long-term debt/CBs 72 728 771 1,433 1,139Provisions/other LT liabs 23 85 68 68 68Minorities/other equity 0 45 5 5 5Shareholder funds 691 1,484 2,522 3,209 4,271Total liabs & equity 2,368 5,003 6,663 8,217 9,167

Ratio analysisRevenue growth (% YoY) 95.2 27.3 141.2 37.3 27.9Ebitda growth (% YoY) 55.1 61.2 112.4 51.6 34.0Ebitda margin (%) 4.9 6.1 5.4 6.0 6.3Net profit margin (%) 3.3 12.8 2.9 3.5 4.3Dividend payout (%) 12.5 0.0 4.6 0.0 0.0Effective tax rate (%) (4.0) (0.6) 1.7 4.9 4.9Ebitda/net int exp (x) 10.8 3.3 3.0 4.6 9.3Net debt/equity (%) 79.1 125.0 126.2 59.5 25.0ROE (%) 23.9 67.7 20.0 23.9 28.4

ROIC (%) 15.8 12.8 15.1 17.4 23.5EVA/IC (%) 1.6 (1.5) 0.9 3.2 9.3Source: CLSA Asia-Pacific Markets


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Recommendation history - Phoenix Petroleum Philippines Inc PNX PM

Date Rec level Closing price Target12 January 2011 BUY 11.20 15.97Source: CLSA Asia-Pacific Markets

Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local marketby 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.Performance is defined as 12-month total return (including dividends).

2011 CLSA Asia-Pacific Markets (CLSA). Note: In the interests of timeliness, this document has not been edited.

The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views andopinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s incompiling such publication/ communication.

The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companiescovered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of intereststhat could affect the objectivity of this report. The Hong Kong Securities and Futures Commission requires disclosure of certain relationships andinterests with respect to companies covered in CLSA's research reports and the securities of which are listed on The Stock Exchange of HongKong Limited and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSAGroup only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this

website, please contact [email protected] or (852) 2600 8111. If you require disclosure information on previous dates, please [email protected]

IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Noticesas set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group,18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. 01/01/2011

phoenix petroleum - the little giant

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